Debt to Equity Formula

The debt to equity formula is total liabilities/equity. This is the simplest version of the equation and considers both long and short term debt. Other versions of the debt to equity formula are adjusted to show long term debt/equity. This can be useful for certain industries but you should also compare it to the original formula (total liabilities/equity).

One thing about the debt to equity formula is that it is only one ratio. It does not give an in-depth view of the company’sdebts but simply makes it easy to tell if something is noticeably off. Companies can also distort this ratio in an attempt to make another ratio look better. One example of this is with return on equity. If a business wants to keep a very high return on equity, it will only accept a certain amount of equity. The rest of the required financing will be from debt, thus optimizing the effect of the equityinvestment.